Mr Hunt’s Last Budget?

From Twelve To Eight

The standout headline of Wednesday’s Spring Budget was the two percent cut in Employees’ National Insurance Contributions NICs), which came further to a similar reduction announced in the Autumn Statement last November. This means that in the new fiscal year commencing 06 April, NICs will have been cut from twelve percent last year to eight percent. That will have a noticeable impact in the take-home pay of median income workers.

The reason why Mr Hunt chose to cut NICs rather than income tax is that NICs are applied only to wages and not to other forms of income. Moreover, people who are in receipt of the state retirement pension (currently those aged over 66 years old) do not pay NICs at all. This cut will benefit those of working age who earn income of between the primary threshold (£12,570 – the same as the personal allowance for income tax) and the upper earnings limit (£50,270 – above which a lower NIC rate of two percent applies). Cutting NICs is also less costly for the Treasury than cutting income tax.

Many commentators have interpreted Mr Hunt’s comments as an aspiration to abolish NICs altogether. Why should wages be taxed twice? Most western European countries which developed welfare states in the years after the Second World War impose social charges much above our level of NICs in addition to income taxes. These are nominally used to fund healthcare, transfer payments and state pensions. Although, in practice, the monies raised go into the same pot of state revenues. In contrast, most formerly communist countries of eastern Europe impose a flat tax on incomes. In Russia (hiss and boo if you wish, but state finances are robust there) the flat tax is set at thirteen percent. (Mind you, Russian tax inspectors – I have been told – sometimes carry machine guns). At a dinner to mark the 50^th anniversary of the Centre for Policy Studies (CPS – a pro-market think tank) on Wednesday evening, the prime minister confirmed that abolishing NICs was “an ambition, long-term”.

National insurance contributions (paid by both employees and employers) bring in about £46 billion a year. Therefore, if we were to abolish NICs and impose a flat tax, that would have to be well above the current rate of income tax. I can see the merit of that in terms of transparency and efficiency, but I am not quite sure that it would be a vote winner.

The Chancellor understands that Britain needs to address the worrying rise in economic inactivity which I wrote about last week. That means that the marginal tax rates applied to those returning to paid employment from living on benefits must be reduced. He has advanced cautiously in that direction.

Desiderata

Over the last 14 years The Tories have not been kind to landlords with the result that a number of investors have exited the buy-to-let market on the ground that it is too much hassle for too little reward. At least on Wednesday the Chancellor reduced the rate of capital gains tax on the re-sale of residential property from 28 percent to 24 percent. But tax breaks for Airbnb hosts who provide furnished holiday lets were scrapped – another body blow to the long-suffering inbound tourist industry. This is already being called the “staycation tax”.

The salary threshold at which people no longer receive child benefit was raised to £60,000. But the personal allowance (currently £12,570, above which income tax is applied) remained frozen until 2028, meaning that millions more low-paid workers will be dragged into the income tax net as inflation persists. Further, many pensioners will have to pay income tax on their state pensions for the first time. That will not go down well.

The non-dom tax status for wealthy foreign residents was effectively abolished, thus shooting Labour’s fox. Windfall taxes on North Sea oil and gas extraction will be perpetuated – much to the dismay of Scottish Tories. Business class travellers will be penalised further. The VAT threshold is to be increased by a measly £5,000 to £90,000.

Rachel Hunt or Jeremy Reeves? Take your pick.

The NHS Forever More

Historically, the spring budget was concerned exclusively with tax rates and thresholds while the autumn statement concentrated on spending commitments for the next financial year. In recent years, however, both fiscal events (as they are now called) have contained both tax and spending provisions.

This budget announced an additional £5.9 billion of spending on the National Health Service – £3.4 billion to upgrade NHS computer systems and £2.5 billion earmarked to meet “pressures in the coming year”. There has been some noticeable improvement in the service offered by NHS Digital over the past year – we can all now download our blood test results onto our mobile phones, for example. 31 million people have now downloaded the app. Hospital efficiency is to be monitored more closely and the best-performing hospital trusts will be rewarded But improvements in IT infrastructure always take time to manifest themselves and it is difficult to monitor the efficacy of spending on consulting services. It does seem that AI systems have already made the analysis of X-rays and scans quicker and more accurate. One hopes the £3.4 billion will be spent wisely and that it will not all go to Fujitsu.

The additional funding for the NHS comes on top of existing spending on health of £182 billion. The cost of the NHS has increased by 5.6 percent per year in real terms since 2019-20. But Mr Hunt intoned the mantra that the NHS is “the biggest reason most of us are proud to be British”. Really? Many of us think it is a Soviet-style embarrassment which is holding the country back. Most comparable countries have health systems which produce better outcomes at lower cost.

As for the bill for pensions, that will increase by 8.5 percent next year – even more than health. Despite the rhetoric, it is difficult not to conclude that spending is out of control.

It is positive that the government is at last talking about the issue of productivity in the public sector. I wrote here recently about how, while productivity has risen in the private sector, it has hardly risen at all in the public sector over the last 30 years or so. The government aims to increase the productivity of the NHS by just under two percent per year by using AI to reduce the amount of time that clinicians spend filling in forms. If the problem is so straightforward, why was it not tackled sooner?

The Macro Picture

Overall, the Budget cut the tax burden by about £13.5 billion in the next tax year. That means that the total tax burden (tax revenues as a percentage of GDP) will not attain a record high next year, as was forecast in the Autumn Statement. But it remains on course to hit 37.1 percent – the highest since 1948. Because of fiscal drag – allowances have not been adjusted for inflation – personal taxes will now be higher as a percentage of GDP than at any time since the Labour government of 1974-79. Millions of low-paid workers were spared income tax altogether under Cameron-Osborne as the personal allowance was more than doubled; now they are liable for income tax again.

The OBR now thinks that the dragon of inflation will have been slain by the end of this year. It opines that growth will reach a less than dizzying 1.7 percent in 2028-29. Public sector net debt will peak at 93.2 percent of GDP in 2027-28, before falling marginally to 92.9 percent of GDP in 2028-29. The is below the level of many of our competitors.

Again, it is positive that the government has decided to focus on GDP per capita rather than absolute GDP. I have been arguing for years that unskilled immigration has been dragging down the amount each individual earns on average. One wonders if Labour will track this metric going forward, though I doubt it.

The Chancellor had nothing to say about defence expenditure, despite increasing geopolitical risk and the lamentable condition of our armed forces which I discussed here recently. Even pacifist Germany will outspend Britain on defence by 2025. Nor did he even mention inheritance tax (IHT) which is applied to an increasing number of estates.

Spending on local government services will rise by just one percent per annum in forthcoming years, despite the fact that many councils are tottering on the brink of bankruptcy. Expect more libraries and public swimming pools to close.

The Rest Is Politics

Marks out of ten? I would award Mr Hunt a commendable but unexceptional six out of ten. He has rekindled a glimmer of hope that was almost lost that the future might possibly be better than the recent past. He has given Tory backbenchers a story to tell on the doorsteps. They can claim with some conviction that the Conservatives are a party that aspires to lower personal taxation and rewards hard work.

But the debt burden carried by the British state is still crippling and the prospect of returning to robust and sustained economic growth is still elusive. Living standards are still falling in many corners as disposable incomes fall. Council tax bills are imminently set to explode – which threatens to wipe out the benefits of the cuts in NICs. The Institute for Fiscal Studies (IFS) calculates that living standards will be lower at the end of this parliament than at the beginning – something we knew already. It is unlikely that the package of measures unveiled on Wednesday will have any material impact on the Tories’ standing in the opinion polls.

The rumour circulating in the run-up to the Spring Budget was that Mr Sunak would call an early general election to coincide with the English council elections and the London mayoral election on 02 May. For that to happen, parliament would have to be dissolved by 26 March – and that is not going to happen given the legislative timetable in which the symbolic Rwanda Bill looms large. The rumour was partly fanned by Labour who could then claim that the Tories are too scared to face the electorate. In fact, the economic outlook may very well look better in the fourth quarter of this year as inflation falls to something near the Bank of England’s official two percent target and interest rates begin to fall. I am sticking with my prediction, made at the beginning of this year in these pages, that the election will take place on 10 October – though George Osborne, who has his ear to the ground, thinks it will be 14 November.

Either way, it is just possible that Messrs Sunak and Hunt will decide to hold a further fiscal event in September. So, the Spring Budget this week might not be Mr Hunt’s last budget after all. But, assuming he is re-elected to the House of Commons – his seat in South West Surrey is a Lib Dem target – and even if, despite the odds, the Tories manage to hang on in power, it is probable that Mr Sunak would want a fresh face at Number Eleven Downing Street. Mr Hunt, for his part, is the only minister, along with Michael Gove the Levelling Up Secretary, who has sat in cabinet almost continuously since 12 May 2010. (He sat on the backbenches during Boris Johnson’s premiership but was summoned back to office when Liz Truss fired poor old Kwasi Kwarteng). He was the longest serving Secretary of State for Health. One has to admire his staying power.

As for Labour, it seems unlikely that they will have much room to manoeuvre and to depart radically from the Conservatives’ tax and spending plans when, as seems likely, they come to power later this year. Labour admits that the imperative is to increase the country’s sluggish growth rate. But, apart from the hype around “green jobs”, it has little idea how this might be achieved. Especially since the TUC, Just Stop Oil, Extinction Rebellion and the Joint Council for the Welfare of Immigrants will effectively attend cabinet meetings.

As Lord Frost writes in today’s Daily Telegraph, the budget did nothing to change our direction of travel towards social democracy and managed decline. None of the established political parties has attempted to confront the essential problem which I have stated in these pages so many times. That is that expenditure on healthcare plus welfare plus state retirement pensions cannot go on increasing at more than three times the growth in GDP for very long before a country gets poorer and poorer, and eventually goes bust.

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It’s that time of year again. The Master Investor Show takes place – as usual, at the Design Centre, Islington – this Saturday (9 March). If you haven’t signed up yet, as over 5,000 people have, it’s not too late until the Show begins at 09:50 hours.

We have a formidable line up of speakers this year, which includes of course our Chairman, Jim Mellon, whose insights are always invaluable. I’ll be the MC on the Main Stage throughout the day, but I hope to spend time talking to attendees and exhibitors between speaker events.

The Show will make you cannier – and, quite possibly, richer. See you there!